Daily Profit Compass March 19

Tickers discussed: SPY QQQ IWM  Strategy and Tactical Update

The Daily Profit Compass provides the stock market analysis for the day. Key levels and trading locations for the indexes are provided, along with trading plans and timely commentary to keep you on the right side of the trade.

Trader’s Couch:      Recognizing, then Managing Max Psychological & Physical Stress

Increasing Volatility, by it’s very nature, implies increasing chaos in any system. It’s true of markets and it’s true of us.  As trader’s, have you been feeling absolutely drained and exhausted after trading these wild sessions over the past few weeks? I have.  I feel it both psychologically and physically.  Being right today, wrong tomorrow; Watching the P & L swings, getting hit with 50 sell alarms in 10min; being proud of yourself for closing a 200% win on a short, then realizing it would have been 800% if you’d have held it 2 days long.  It wears on you day after day.

Now a corona -virus chaos overlay blankets your world.  With the corona shut down your kids and possibly your significant other are at home. Kids are scared. Financial implications loom with the possibilities of a layoff coming. While you love them all, they’re bugging you and quite possibly offer a convenient scapegoat for your recent losses or for not making an “absolute killing”.

Prescriptions for Managing the Stress

• Recognize how the chaotic environment is impacting you.
• Take care of your personal health first.
  • You’re no help to anyone unless you’re both physically and mentally healthy
  • Walk or workout during the day; get a good night’s sleep; eat right
• Take care of your kids
  • Kids are vulnerable now; the shock wave of school cancellations, isolation and peak fear in the media probably has them reeling
  • Comfort and re-assurance will knock down that fear
• Take care of your significant other and possibly elderly parents
  • Keep the team together and strong.
  • Work hard to keep them out of the doom loop of constantly imagining the most dire outcomes.
• Trading Tweaks
  • Set boundaries for your work space.
    • When your door is closed you’re working / trading
    • Have them send you a text if you’re needed
    • Touch base with them 3-4 times during day
  • Reduce position size
    • Trading over-sized positions with the VIX at 85 is a kamikaze run of max psychological and financial stress when the market is tossing you $2 5min bars
    • Back it down and that stress will subside.
    • Be aware and responsive to your body’s input.
    • Trading against what your body / mind are telling you is a recipe for mistakes and potentially massive losses
  • Consider 1/2 day sessions
    • In this market, if you trade well, you can make more in 4 hours than you could in a week a short time ago.
    • The average return for equities is about 8.9% a year.  We are seeing 4-10% a day. Do the math
    • Less time in the chair may mean more as your focus and clarity of thinking explode
  • Consider fewer trades
    • Instead of trying to catch every minor reversal, wiggle and pop, wait for the primo set -up then don’t touch it. Let it work
    • Increase your time frame by 1;  If you usually trade the 5min time frame, move out to the 15 min.; if you trade the 60 min  chart, move to the 2-hour
      • The result will be fewer trades that last longer; a less intense way to go
      • A side benefit of fewer trades is less slippage in your option round-trip
      • The bid / ask spread has exploded. Market makers make you pay ask and sell on the bid. You can easily loose even if you’re right
      • The longer you can hang in a trending trade the fewer trades you’ll make and the less slippage you’ll have.
  • Consider simply stopping
    • When it’s all said and done, if the outside responsibilities and pressures fill up your bandwidth, just stop trading until the storm has passed.
    • Your primary obligation as a trader is to preserve your trading capital, not to make money.
    • If you participate in this market while distracted, preoccupied, and stressed out, you’ll be throwing money away.

Earnings

News Flow

• The Global liquidation rolls on
• $1.2T Corona-relief bill crawls thru Congress.
• Kudlow floats idea of gov’t buying equity stakes in at-risk companies to stave off BK filings.
• Domestic car makers pull the plug on production
• Unemployment offices get swamped
• $USD goes vertical as max demand for liquidity and safe haven push the US near 3 year highs further crushing EEM
• Oil hits 2003 low; Copper craters
• Lagarde pledges “full support” after a rocky start to her ECB Presidential Term.
• Corona cases hit Amazon and Capitol Hill

Did we just see peak Corona?

Yesterday felt a little different. Non-stop devastating news -flow bazooka hits to the collective body of the market and trader psychology.

Here is a small sample:

• 475 people die in Italy in one day
• Bill Ackman says if we don’t shut down the world for 30 days, hospitality and many industries will go to zero
• Delta pulling plug on 75% of capacity and grounding 600 planes.   Not to be outdone, Lufthansa is grounding 700 planes and 95% of capacity
• Domestic auto makers shutting down
• Hotel operators laying off tens of thousands just for starters.
• Biggest Factory shutdown since WW2
• TLT is trading like a biotech with bond yields  moving 20% in a day
• $USD moonshot as max liquidity and funding stress hit
• Oil hits 2003 low. Analysts say single digit oil is possible if nothing changes.
• Credit spreads are blowing out all over the place.
• Mounting voices calling for market shutdown and short-selling ban

Wow. I’m getting more bearish just reading that. And that’s the point. I am feeling like I did in 2016 near the lows. Everyone bearish, everyone short.  Back then, I maintained my shorts in the face of massive bearish news flow and got my face ripped off. Feels wrong to press shorts here. Yes I am bearish. Yes I think we are going lower. Yes I think news flow does get worse as case and death count builds, but I think there will be a brief window of relief coming which will be aided by the fiscal stimulus.  On the technical side, both SPY and QQQ undercut key support levels in afternoon trading, then reclaimed those levels by the close. That’s a “look below and Fail” and it’s a bullish set up.  There is work to do on a bullish rip your face off rally, but at a minimum, I think the risk reward does not favor adding to or establishing new shorts.  That said, If we break yesterday’s low, the idea is wrong and we go lower.  Be light on positions here with max mental flexibility. Wait for the technical triggers to get long for a tactical long trade entry. Once long, we’ll be keenly aware of overhead resistance levels to scale out and re-set shorts at higher levels where the risk / reward will be much more favorable. Remember as always, price is what pays. I am happy being wrong but on the right side of the trade vs clinging to a thesis when price is going against me. 

Index Chart Review

SPY 60 minute

Whether it plays out or not the technical set up of a bullish falling wedge with bullish divergence sets up as a potential bullish set up. To my eye the trigger is a break above $250. With a break above, price would target $260. Although it would be tougher, a break above $260 would open the door to $272.50 / $275. Keep in mind, this is a set up and bull set -ups often fail in bear markets. A failed scenario would look like a run to $250 that gets rejected.  If you see price up near $250 but just cant get thru, active, nimble traders could try a short against $250 and shoot for a back test of yesterday’s low near $230.  A break below $230 opens the door to the 2016 breakout level near $210

QQQ 30 min 

$180 is a key level for QQQ.  Again we have a bullish falling wedge with bullish divergence with multiple holds at the lows. Normally this set up “should” be bullish.  I like the idea of trying a long trade if/ when price breaks above $180 looking for targets above. Like with SPY, if QQQ got to $180 and is rejected, traders can try a short against $180 and look for a move to back test yesterday’s low.

Watching FAAMG names concurrently w/ QQQ is a great way to get a read on price action and relative strength.

IWM 15min

I normally would not show a 15min chart, but it did a better job of showing the key levels. To my eye, a break above $102.50 opens the door to higher prices. Pretty open path to $112.50 if price can break through.

I think if IWM starts working, SPY and QQQ will already be working. Hard to fathom IWM leading higher  but thats what alarms are for.

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